Question

Addison Co. has one temporary difference at the beginning of 2017 of \(500,000. The deferred tax liability established for this amount is \)150,000, based on a tax rate of 30%. The temporary difference will provide the following taxable amounts: \(100,000 in 2018, \)200,000 in 2019, and $200,000 in 2020. If a new tax rate for 2020 of 20% is enacted into law at the end of 2017, what is the journal entry necessary in 2017 (if any) to adjust deferred taxes?

Short answer

The temporary difference is the variation in the amounts of total assets or liabilities of an organization due to the carrying amountentered in the financial position statement and the income tax section of the company.

Step-by-step solution

Computation of the deferred tax liability for 2017

$\begin{array}{rcl}\mathrm{Deferred}\mathrm{tax}\mathrm{liability}& =& \mathrm{Taxable}\mathrm{amount}\times \mathrm{Change}\mathrm{in}\mathrm{tax}\mathrm{rates}\\ & =& \$200,000\times \left(30\%-20\%\right)\\ & =& \$200,000\times 10\%\\ & =& \$20,000\end{array}$

Journal Entry

Addison Co.
Journal Entry
Date	Particulars	Debit	Credit
2017	Deferred tax liability	$20,000
	Income tax expense		$20,000
	(To record the income tax expense)